Michele Robitaille- Guardian Capital LP

Manager reflects on equity-income transition since 2006 fright night.

Michael Ryval 31 October, 2014 | 5:00PM
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It was eight years ago today, on Halloween, that then-federal finance minister Jim Flaherty dropped a bombshell on the investment-trust sector and effectively wiped out the tax-exempt status for most trusts. Yet while trusts took an immediate hit, sending the benchmark S&P/TSX Income Trust Index down 12.4% that day, they ultimately rallied and the ensuing four-year period resulted in an orderly phase-out.

"The transition has been as smooth as it could have been," observes Michele Robitaille, co-manager of the $1.9-billion BMO Monthly High Income II Mutual and managing director at Toronto-based Guardian Capital LP. "Over the four-year transition, a number of income trusts either consolidated or went private. If you look at our portfolio, though, it didn't really change much because of our investment style. We were always focused on the underlying companies and their fundamentals, as opposed to the investment-trust structure. It was always all about the underlying companies."

As many of the firms in the portfolio converted to the corporate structure, Robitaille and co-manager Kevin Hall, managing director, began to include dividend-paying stocks such as banks, telecommunications providers and some consumer-staples names. Yet many of the existing names continued to stay in the portfolio, including Baytex Energy Corp. BTE  and Boardwalk REIT BEI.UN .

Moreover, although some investors lost heavily when they sold out early, those who held the course have been rewarded, argues Robitaille. "They have done very well in this space." On a five-year and 10-year basis, the 4-star rated fund was a first-quartile performer and returned an annualized 13.8% and 9.7%, respectively for the periods ended Sept. 30.

More recently, however, the fund has lagged the median in the Canadian Dividend & Income Equity category and fallen into the fourth quartile. "Our fund tends to do well in flat or down markets. Where we tend to underperform is when markets are running hard, or there is a low-quality rally or it's driven by particular sectors," says Robitaille, noting that the first half of 2014 was driven by energy and materials stocks, which have since reversed direction. "It's hard to keep up when there are dominant trends in the market and you don't own specific stocks."

Robitaille and Hall look to generate 6% to 8% total annual returns, which combine a 4.2% running yield and 2% to 4% in capital gains. To meet that objective, they have about 30% in energy names, 15% banks, 15% real estate investment trusts, 9% insurance companies, 6% consumer discretionary and smaller weightings such as 5% in telecommunications. They limit single holdings to about 5% of fund assets.

Michele Robitaille

With the current volatility in the market, Robitaille has taken advantage of share-price weakness and added to core holdings such as oil and gas explorer and producer Vermillion Energy Inc. VET  "We're cautious on the market. You could see continued volatility, with a number of geopolitical risks such as the Russia-Ukraine conflict," says Robitaille. "And there are economic risks, with China showing relatively softer data points and Europe continuing to stagnate. Outside of the U.S., which is the one bright spot, the rest of the world is having some challenges in terms of growth."

A Vancouver native, Robitaille trained to become an accountant but decided the investment industry was more interesting. After graduating with a bachelor of commerce from the University of British Columbia in 1993, she joined Price Waterhouse, where she worked in mergers and acquisitions and developed an interest in corporate finance.

In 1997, Robitaille was hired as an equity analyst by Canaccord Capital Corp. in Vancouver. Within a year, she moved to Canaccord's Toronto office and worked as a special-situations analyst. In 1999, she was hired as an equity analyst by Scotia Capital Inc.

In 2002, and after spending some time to travel, Robitaille joined National Bank Financial as a business-trusts analyst. In 2003, she was hired by Guardian Capital as a portfolio manager and joined the team that included Kevin Hall and John Priestman. Since January 2010, she has been co-manager, with Hall, of BMO Guardian Monthly High Income, as the BMO fund was formerly known.

In terms of dividing up responsibilities, Robitaille looks after the energy, telecommunications and consumer-discretionary sectors, while Hall concentrates on financials, materials and utilities.

Looking ahead, although Robitaille is relatively bullish about the U.S., she is worried about the extent to which weakness in Europe and Asia will dampen U.S. growth prospects. Meanwhile, given the inevitable rise in interest rates, she has gradually positioned the fund to be less defensive and more levered to economic growth. "We want to hold companies that have the ability to grow their dividends over time and can grow in the face of rising interest rates."

On that basis, Robitaille likes companies such as AltaGas Ltd. ALA , which has interests in natural-gas processing, power generation and utilities. "The bulk of its earnings come from long-life assets," she says, adding that the firm is expected to generate 10% compounded annual growth rate in earnings in 2015 and beyond. Moreover, the stock is attractively valued as it trades at about 13.7 times enterprise value (EV) to earnings before interest, taxes, depreciation and amortization (EBITDA). "It's cheaper than many of its peers, which trade around 14.1 times EV to EBITDA."

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
AltaGas Ltd30.34 CAD0.23
Baytex Energy Corp4.48 CAD-0.88
Boardwalk Real Estate Investment Trust69.32 CAD-0.62
Vermilion Energy Inc15.21 CAD-1.17

About Author

Michael Ryval

Michael Ryval  is regular contributor to Morningstar. He is a Toronto-based freelance writer who specializes in business and investing.

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